Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
Navigating Australian capital flows
The spending and saving behaviour of a cautious consumer
During 2012, we sought to outline Australia’s relative structuralfinancial strengths. Specifically, we discussed the characteristicsof: our net foreign debt (this burden ultimately lies withhouseholds, not the Australian Sovereign); our net foreign assets(diversified and of a significant scale); and, in the last edition, theidiosyncrasies of our current account (the growing importance ofequity flows and the declining influence of private-sector debt).In this edition, we focus on the Australian consumer, theirhistorical leveraging and new-found preference for saving. Withthe help of the annual National Accounts and the FinancialAccounts releases, we go beyond the raw savings rate and lookmore deeply into household’s ‘cash’ savings and their investmentbehaviour over the past two decades.
In the past 25 years, Australian households have experienced adramatic change in conditions. Over the three and a half yearsto September 1993, the standard variable mortgage rate almosthalved to 8.75% as inflation pressures abated; it subsequentlyaveraged 7.8% prior to the GFC rate-cut cycle. During those 15years, the unemployment rate also declined by almost 7ppts to4% as 3.2 million jobs were added, 62% of which were full time.Over this period, banks increasingly favoured housing. Mortgagedebt’s outperformance in the 1990s recession, weak corporatecredit demand thereafter, and mortgages’ favourable riskweighting under Basel I all supported a 16ppt increase in housingloans’ share of total bank lending, to 46% by 1995, and 58% by2010 (
The State of the Mortgage Market
, Guy Debelle, 2010).
As households increased leverage
-20020406080100120140160180Mar-77Mar-87Mar-97Mar-07-20020406080100120140160180%%total debtowner occupier housing debtinvestor housing debtother debtratio to income (lhs)
Sources: RBA, Westpac
–0.5ppt pa+0.8ppt pa–0.1ppt pa–1.1ppt pa
8 May 2013
In the past 25 years, Australian households haveexperienced a dramatic change in conditions. Interestrates and unemployment fell materially and remained low;all the while, financial innovation boomed.
This facilitated significant changes in consumer spending,saving and investing behaviour.
The 1990s saw households save little and increase theirleverage substantially as household net worth surged.
The tech bust and GFC resulted in Australian consumerstaking a hard look at their finances, but they are yet todeleverage in aggregate. To date, the leverage taken on byfirst home buyers and (at the margin) upgraders has offsetreductions made by existing borrowers.
The rise in the savings rate of the latter group pointsto leveraged households building an immediate bufferagainst a cyclical shock (likely via mortgage offsetaccounts).
In tandem with our Westpac–MI Consumer Sentimentsurvey, information from the Financial Accounts indicatesthat consumers are unlikely to unwind this buffer soon.Indeed, adverse conditions may see it rise further.
Rise in debt more than an adjustment to low rates
Interest expense* (lhs)Standard variable mortgage rate (rhs)
Sources: ABS, RBA, Westpac Economics*% of net disposable income.All data year to June.
Household worth rose dramatically
Net worth –super & insurance*Net worth –other*Net savings rate (rhs)
Sources: ABS, Westpac Economics
%of net disposable income
*Annual change in net worth,scaled by net disposable income.All data year to June.